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In its ongoing sector inquiry into e-commerce in the EU, the European Commission has published a Preliminary Report of its findings. Launched in May 2015, the sector inquiry is aimed at gathering evidence on potential barriers to competition linked to the growth of e-commerce and understanding the prevalence of potentially restrictive business practices. The Commission already has published a report concerning its initial findings on geoblocking (see our April 2016 Alert on geo-blocking).

The inquiry forms part of the Commission-wide Digital Market Strategy, which outlines several actions through which the Commission envisages to create a "Digital Single Market." Ensuring better access for consumers and businesses to goods and services via e-commerce across the EU is one of the Commission's key objectives. Whereas most of the actions of the Digital Single Market strategy seek to address regulatory barriers to cross-border online trade, the sector inquiry investigates barriers created by companies.

Preliminary Report findings

E-commerce in the EU has grown steadily over the past years, the EU now being the largest e-commerce market in the world. The percentage of individuals aged 16 to 74 ordering goods or services online has continuously grown, from 30 % in 2007 to 53 % in 2015. Despite this growth, in 2015 only 15% engaged in cross-border e-commerce, shopping online from a seller established in another Member State.

As concerns consumer goods, the Report confirms that e-commerce is an important driver of price transparency and price competition, enhancing consumers' choice and ability to find the best deal. However, as a reaction to increased online price transparency and competition, manufacturers seek "tighter" control over distribution so as to better control price and quality of distribution. This is usually achieved by vertical integration, by using a selective distribution system rather than an open one, or by contractually imposing vertical restraints upon distributors.

Vertical restraints can take various forms, such as pricing restrictions, the unjustified exclusion of pure online players in selective distribution systems, restrictions to sell or advertise through certain online channels (including online marketplaces, price comparison tools, and search engines paid referencing services), and cross-border sales restrictions (e.g. imposing geo-blocking measures). Whereas unilateral business decisions generally fall outside the scope of EU competition law (except for the situation of dominance), contractually imposed restraints may constitute unjustified restrictions of competition. The Commission acknowledges that justifications may exist – the Report for example examines the "free-riding" problem, where online shops free-ride on the efforts made by brick and mortar shops – such defense of a vertical restraint must be assessed individually in each case and will not justify all restrictions.

In relation to the online distribution of digital content, the preliminary results of the inquiry show that contractual restrictions, in terms of licensed transmission technologies, timing of releases and licensed territories, are the norm in digital content markets. Moreover, the large majority of digital content providers are required by right holders to restrict access to their online digital content services for users from other Member States by geo-blocking. Another widespread practice is exclusive licensing, whereby exclusivity may be granted in different forms, such as in relation to territory, technology, and time.

However, under certain conditions such arrangements may reduce competition, for example by making it more difficult for new business models and services to emerge and for new or smaller players to enter. The Report mentions the scope and duration of licensing agreements, the parties' market power, and the structure of payments as factors to be taken into account when assessing possible restrictions of competition.

Implications of the Commission's findings

As a follow-up to the sector inquiry, the Commission announced that it may further investigate the compatibility with the EU competition rules of certain practices that it identified as potentially harming competition, such as pricing restrictions, restrictions on online sales, territorial restrictions, and restrictive licensing practices. From past experience with sector inquiries, it can indeed be expected that separate enforcement actions targeting individual companies may follow, as happened following the EC energy, pharmaceutical, and telecom sector inquiries. In each case, the Commission will assess, on a case-by-case basis, having regard to the characteristics of the specific product and geographic markets, whether the practices restrict competition and whether enforcement by the Commission or national competition authorities is necessary.

In her speech delivered the day of the Preliminary Report's publication, the Commissioner for Competition, Mrs. Vestager, stated that the EC Report "should be a trigger for companies to review their current distribution contracts and bring them in line with EU competition rules if they are not." She added that some companies started doing so in the course of the sector inquiry.

The Commission already has pending antitrust investigations in the context of access to digital content. After having issued a Statement of Objections in July 2015 to Sky UK and six Hollywood studios for alleged geo-blocking, the Commission recently accepted commitments from Paramount to their geo-blocking, while continuing its investigation against the other parties. The Commission likewise has opened an investigation in the video game sector, suspecting illegal restrictions of cross-border commerce. It is likely that other candidates for further EU antitrust assessment have already been identified.

Commission regulatory initiatives

In parallel, the Commission is preparing a legislative package to harmonize online sales conditions. After having published its initial findings on geoblocking earlier this year, the Commission proposed a Regulation addressing geo-blocking and other forms of customer discrimination, which is currently being considered by the European Parliament and Council. The proposal prohibits the blocking of access to websites and other online interfaces as well as the rerouting of customers from one country version to another.

The Preliminary Report is open to public consultation for two months. Stakeholders are invited to comment on the findings of the Sector Inquiry, submit additional information and raise further issues. A Final Report addressing the effects of geo-blocking on e-commerce is expected by the first quarter of 2017. In the meantime, the Commission certainly will initiate new investigations into restrictive practices it identifies.

Nathalie A. Smuha, an associate in the Brussels Office, assisted in the preparation of this Alert.

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